R.J. Hottovy: Amazon's had a busy 2017 thus far, but many of the moves the company's made have left investors scratching their heads as they seem to run counter to how the company's built up its e-commerce dominance the past couple of decades. While many of the moves the company's made can be simply looked at as land grabs into the grocery, apparel, or other categories, we do see that a lot of the moves that Amazon's made in 2017 are part of a larger shift in strategy.

Really there's two areas that we're focused on right now: the pivot from Prime member acquisition to Prime member engagement, and making the marketplace more accommodating to third-party vendors. On the Prime membership front we believe the company is embarking in a strategy shift away from Prime acquisition into Prime engagement. We estimate that there are over 80 million Prime memberships in the U.S. today, spanning 67 million households. At that rate of saturation, we believe that it will be just be a few more years before the company tops out and needs to get more engagement and frequency out of those Prime members. We believe this is the primary motivation behind the Whole Foods acquisition, as grocery category tends to be a much more frequent purchase and less susceptible to economy cycles. In addition, the company gets the benefit of expanding its private label portfolio, which tends to be higher margin product; it gets a new source of customer data; and it will allow the company to find new ways to improve the in-store experience with its hardware products.

With respect to its platform, Amazon has been transitioning away from a first-party marketplace, where the company records gross revenue on the products and services sold, to a third-party marketplace, where Amazon simply collects a commission from other third-party sales on its platform, for the past several years. We expect this to continue especially with new partnerships with Nike, Ethan Allen, and other consumer brands that have been announced this past year.

We believe the important factor here is that many consumer brands don't have the logistics capabilities that Amazon has, and with reverse logistics, or product returns, becoming a big part of the consumer purchasing decision, we think Amazon has a tactical advantage and will continue to bring more and more sellers onto the platform.

Now what does this mean for the rest of retail industry, which has fallen out of favor with the market based on many of Amazon's move to date in 2017. I think it depends on a number of factors, but ultimately those retailers that have the best combination of specialization, convenience, and experience are the ones poised to compete in an Amazon world. At the top of the list we think of retailer like Wal-Mart--which has the scale, relationships with suppliers, as well as the logistics capability to compete--is in a position to be a solid number-two player in the e-commerce space. Beyond that we think that the market is unfairly punishing several names in the auto parts, home furnishing, and grocery space, where admittedly competition with Amazon is a risk, but many of these companies have taken several years to reposition their business platform to better compete.

On the auto parts side, we like a name like Advance Auto, which has logistics capabilities that do-it-for-me professionals need. On the home furnishing side, we like Williams-Sonoma, which is a e-commerce platform that is the envy of many other specialty retailers. On the grocery front we like a name like Kroger, which at least over the near term has gas stations and several unique products that gives it an advantage over Amazon.

While those companies aren't immune to risk from Amazon, we think that they are solid near-term plays.